Sometimes performing the financial side of due diligence is the easy part. But experts suggest getting a handle on the emotional side of the transaction will lead to a stronger outcome.

Buying or merging a business is a big deal. These are transactions that can change your life as well as that of many others. And when the stakes are high, so are emotions, which make mergers and acquisitions (M&A) much more than business as usual.

Many books and white papers explain what you should include when doing financial due diligence. However, few resources dive into the emotional side of M&A. In past seasons of In Good Companies, Cadence Bank’s highly rated business podcast, we've discussed the emotional side of acquiring, selling and merging businesses with leaders of two successful private equity firms. Here, we’ve summarized three important recommendations from GrowCo Capital’s George Robertson and Joshua Robertson and LDR Growth Strategies’ Rich Sexton about adding emotional due diligence to the review process you’re already managing.

First, be crystal clear about the things that are important to you.

Joshua Robertson calls it knowing your personal North Star. Before looking for businesses to acquire or merge with, ask yourself important questions and document your answers to help understand your motivations and goals. Knowing your vision and motivations can help you more quickly determine whether prospects and proposals fit well.

Ask yourself questions like:

• Why do I want to purchase a business?
• What type of person (people) do I want to be in business with?
• Do I want to stay in the same industry or explore a different one?
• Do I want to run a business full time or hire someone to run it?
• Am I buying this business to make a lot of money? To change an industry? Both?

“I've been in and out of relationships with business and financial partners a lot, and looking back through my career, it comes down to personality and values,” said George Robertson. “I mean, you can get money at a lot of places, but there's just a lot of people you don't want to be in business with. I just think it's very important to have business financial partners that are on the same page from a values standpoint.”

Next, get to know the current owner and understand why the current owner wants to sell.

“I think being genuine … is really important. What we find is that if you can create transparent social capital with the seller, you can easily ask them what they want to do in their ‘next chapter.’ ”

Rich Sexton

Sexton continued, “They don’t necessarily want to go fishing for the next 30 years of their retirement. Someone may be interested in designing a new component part or interested in the sales customer-facing role. Having a collaborative conversation allows us to put them in whatever lane they are interested in — but not as an employee.”

Find out things like:

• Does the current owner want to retire? Start another business?
• Does the current owner want a role in the business going forward or to exit completely?
• What legacy does the current owner want to walk out with?
• Is the current owner leaving a strong imprint on the business’ brand?

Third, get familiar with the company’s culture.

Owners selling businesses aren’t the only ones who will have strong emotions. Employees will, too. So that’s why it’s important to have a vision and a strategy to communicate that vision.

“When people hear of change, the emotion they go to first is fear. When we took on investors, I used a routine monthly fireside chat to communicate what was going on. I even included the main investors on the call. My message was simple, something like, ‘hey we’ve set a path and want to accomplish more things over the next few years, but we need some outside help to get it there.’ ’’

Joshua Robertson

Find out things like:

• What is the organizational structure?
• Which employees influence others? Are influencers likely to leave or stay?
• Look at performance evaluations and verbatim responses to get a sense of the day-to-day operations.
• What will it take to get people past the idea of “well, this is how we do it?”

According to Sexton, “The most dreaded but most commonly used term I hear is ‘this is how we’ve been doing it for the last 20, 30 years.’ Change management is best in very, very small bites. And consider giving the current company leadership a personality assessment to learn their trust level among employees.”

Even when you’re out of school, there’s always homework to do.

When contemplating acquiring, merging or selling a company, emotions will run high for both the buyer and seller. No matter which side of the table you’re on, it’s important to keep your emotions in check, because they can cloud your judgment or make you lose sight of your ultimate goals.

That’s why our experts recommend performing your emotional due diligence, which consists of doing your homework around these three groups of questions:

• Be crystal clear about the things that are important to you.
• Get to know the current owner and understand their future plans.
• Get very familiar with the corporate culture.

Learn more about the ways Cadence Bank works with small- and mid-size businesses at CadenceBank.com.

For even more insight about M&A for small- to mid-sized companies:

• Listen to Rich Sexton and Will Brame with LDR on the In Good Companies podcast: Discipline, Patriotism, Family: Veterans’ Lessons in Business Ownership (Season 4, Episode 6).

• Listen to George Robertson and Josh Robertson with GrowCo Capital on the In Good Companies podcast: How to Deal with the Deal: The Human Side of M&A (Season 3, Episode 8).

This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.